Marketmind: October market fillip as govt stays open

A look at the day ahead in U.S. and global markets by Mike Dolan

A six-week reprieve for U.S. government funding that keeps public services functioning through mid-November has been enough to give stocks and bond yields a lift as the final quarter of 2023 gets under way.

Most traders had assumed a shutdown from Sunday was inevitable – with all the disruption that entails, including hits to workers’ salaries and dissemination of critical economic data.

But Congress passed a stopgap funding bill late on Saturday with Democratic support after Republican House Speaker Kevin McCarthy backed down from an earlier demand by his party’s hardliners for a partisan bill.

While positive for the economy in the short term, the temporary extension only keeps the government functioning to Nov. 17, McCarthy faces attempts by right-wing factions to remove him and concerns about the stop-go nature of the U.S. system of public financing will weigh on its only trip-A credit rating.

What’s more, the political machinations to force the stopgap bill left out additional military aid for Ukraine – at a critical juncture in its attempt to repel a Russian invasion.

The remaining “ifs” and “buts” – and a reminder of very real U.S. political risks going into a presidential election next year – mean the market reaction has been relatively muted.

Goldman Sachs analysts, however, think the risk of another shutdown in November is slightly less this time around and reckon some progress on a strategy for full-year spending bills is possible from here.

After a torrid September, U.S. stock futures were about 0.5% higher ahead of Monday’s bell and the Vix volatility gauge hovered close to Friday’s close about 17.5.

U.S. Treasury yields, whose relentless rise of late has been at the heart of market disturbances as it prices “higher for longer” interest rates, pushed higher again on Monday too. Ten-year yields were up five basis points to 4.62% – just shy of last week’s 16-year peak of 4.69%.

The dollar was higher too, with the dollar/yen exchange rate probing just under the 150 level many suspect will sound intervention alarm bells at the Bank of Japan.

Aggravating bond yields have buoyed U.S. crude oil prices, which remained above $91 per barrel on Monday with gains back running at more than 10% year-on-year.

The Organization of the Petroleum Exporting Countries with Russia and other allies, or OPEC+, holds a Joint Ministerial Monitoring Committee meeting on Wednesday, although four OPEC+ sources told Reuters it’s unlikely to tweak its current oil output policy this week.

Another aspect of the averted government shutdown for markets is this week’s September U.S. employment report will be released after all – a mixed blessing for bonds given the traditional volatility surrounding the release and the fact ongoing labor market tightness is keeping the Fed hawkish.

Consensus forecasts are for another 163,000 rise in non-farm payrolls last month, down from the 187,000 gain in August and with an expected downtick in the unemployment rate to 3.7%. It’s a big labor week all round, with August job openings data due on Tuesday and private sector payroll numbers from ADP out too.

On labor relations more generally, the third week of autoworkers’ strikes escalated on Friday as unions expanded the action again to the ire of auto company executives.

On the data slate on Monday were a series of September survey readings from the manufacturing sector.

Closely-watched business survey equivalents from China out earlier showed activity deteriorated again in both manufacturing and services last month and again questioned hopes for a rapid rebound of the giant ailing economy.

Chinese markets are closed for most of the week for a holiday.

European manufacturing readouts for last month were similarly downbeat, though the situation was better in France, Italy and Spain than in the region’s biggest economy, Germany.

Key developments that should provide more direction to U.S. markets later on Monday:

* US Sept manufacturing surveys by ISM and S&P Global. US Aug construction spending

* Federal Reserve Chair Jerome Powell participates in roundtable with workers, small business owners in York; Fed Vice Chair for Supervision Michael Barr, Cleveland Fed President Loretta Mester and New York Fed chief John Williams all speak

* U.S. Treasury auctions 3 and 6-month bills

(Editing by Nick Macfie)